4000 - Advisory Opinions

This is in response to your memorandum of December 3 in which you
raise several questions about deposit insurance.

The insurance regulation (12 C.F.R. § 330.3) provides separate and
additional insurance for an individually owned testamentary account
that is payable on the death of the owner to his or her "spouse,
child or grandchild", but neither the regulation nor a germane
statute defines these terms for this purpose. The word "child",
in its ordinary, or dictionary, meaning, and in its primary meaning as
a legal term, includes an adopted child and a child born out of
wedlock, as well as a natural child born in wedlock, but not a
stepchild. However, for several years past, a number of opinions have
been issued by the Legal Division holding that a stepchild is a
"child" (and a stepgrandchild is a "grandchild") for the
purposes of testamentary account deposit insurance--a position taken
also by the FSLIC--and, in my opinion, we should adhere to this
position until such time as the regulation is revised. The unique
result is that, until the regulation is revised, a stepchild can be a
qualifying beneficiary on a testamentary account owned by a stepparent,
as well as on such an account owned by a natural parent. A natural
parent of a child that has been given up through adoption cannot claim
that child as a qualifying beneficiary for testamentary account deposit
insurance purposes, but the adoptive parent can do so.

The insurance regulation (12 C.F.R. § 330.2) provides that funds
owned by a minor and (as is permitted by the laws of some states in the
case of minors of a specified minimum age) deposited in the minor's own
name, or deposited by another in his or her own name in a
representative capacity for the benefit of the child, are added
together and insured to $100,000 in the aggregate. The crucial
requisite for this insurance coverage, of course, is that the funds be
actually owned by the minor, and the FDIC would ordinarily require
evidence to establish that fact, lest such accounts be established as a
sham in an effort to increase deposit insurance coverage. This
requirement might be met, for example, by showing that the funds were a
gift made in conformity with a "Uniform Gifts to Minors Act", per
the regulation, or by a showing that the funds were inherited by the
minor, or awarded to the minor in a lawsuit, and such like. It is, in
short, not enough for these purposes for an account merely to be
established by a parent, for example, for the alleged benefit of a
minor owner, whether or not the minor is old enough under state law to
hold the funds directly and to execute a signature card.

The right of the owner of a time deposit to withdraw the funds prior
to maturity, and the right of the bank to exact a penalty for early
withdrawal, are governed by the deposit contract. If a time deposit
owner wishes to have such a right in the event the bank becomes
uninsured, he or she should see that it is provided for in the
contract. (Otherwise, the depositor's resort, essentially, would be to
contend in litigation that the bank's retention of deposit insurance
constitutes an implied condition of the deposit contract under state
law, with the outcome being generally uncertain.)

A bank that assumes a deposit as a result of a merger (or similar
transaction) stands in the contractual shoes, as it were, of the bank
that originated the deposit and cannot
unilaterally alter the (interest rate
or other) terms of the deposit contract (nor can the
depositor).